introduction to business & marketing credit. objectives compare the types of consumer credit....
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INTRODUCTION TO BUSINESS & MARKETING
CREDIT
Objectives
Compare the types of consumer credit.
Describe the advantages and disadvantages
of using credit.
Identify the elements of creditworthiness (3
C’s).
Explain the importance of credit reports.
What is Credit?
Credit: Key Terms
Credit – an agreement to obtain money, goods, or services NOW in exchange for a promise to pay LATER
Creditor – lends money or provides credit
Debtor – borrows money or uses credit
Credit
Credit is based on the creditor’s confidence that the debtor can and will repay the debt (creditworthiness).
Interest – fee that creditors charge a debtor for using their money
Types of Credit
Types of Consumer Credit
Charge Account credit provided by a store or company for customers to buy its products
Types of Consumer Credit
Credit Card – can be used in many different places
Issued by banks (i.e., Bank of America Visa card)
Some have annual fees ranging from $25 to $80
Creditors earn money from interest charges, annual fees, and penalties
Types of Consumer Credit
Installment Loans – loans repaid in regular equal payments over a period of time
Includes student, car, and home improvement loans
Debtor receives loan for a certain about of time (i.e., 60 month loan)
Debtor makes equal monthly payments that cover loan plus interest
Types of Consumer Credit
Mortgage Loan – a form of installment loan, only it is written for a long period of time (15 – 30 years)
Home serves as collateral, something of value the bank can take
Types of Loans
Short-term: one year or less
Medium-term: one to five years
Long-term: more than five years
Store Card
Credit Card
Student Loan
Car LoanMortgage
Pros & Cons of Using Credit
Advantages of Using Credit
Convenient Shop and travel without carrying large amounts of cash Buy expensive items (like cars) now and use right away Good for emergencies (i.e., unexpected car repairs)
Establish Credit Rating A credit rating is a measure of a person’s ability and
willingness to pay debts on time. Good ratings tell other lenders you are a responsible
borrower and a good credit risk.Contribute to the Growth of Economy
Consumers are able to buy more goods and services Businesses can hire more workers to produce more
Disadvantages of Using Credit
Easy to Misuse Tempting to buy things you cannot afford or don’t
need
Can be difficult to resist sales or offers for more credit
Higher Cost Things cost more when using credit instead of
cash because of the interest fees
Committing Future Income Debt must be repaid
The Truth About Credit
The more credit card bills you have, the harder they are to pay.
After a while, you may reach your credit limit (point where you cannot charge anymore).
Late or missed payments lower your credit rating!
WHEN YOU APPLY FOR CREDIT, CREDITORS
WANT TO MAKE SURE YOU ARE WORTH THE
RISK.
Creditworthiness (3 C’s)
3 C’s: Capacity
Capacity is the consumer’s ability to repay the loan.
Creditors look for: Verified employment
and income Debt Ratio – current
amount of debt compared to income
3 C’s: Character
Character is the consumer’s proven trustworthiness in repaying debts.
Creditors will check: Credit references
Credit report
3 C’s: Capital
Capital is the amount of money the applicant has beyond their current debts.
Creditors will check: Savings Investments Potential
collateral
Creditworthiness – The 3 C’s
Your 3 C’s will also affect your credit limit. Debtors are usually allowed a higher limit if bills
are paid on time.Your 3 C’s may affect your annual
percentage rate. Annual Percentage Rate (APR) – credit interest
rate calculated on a yearly basis Credit cards might offer a low introductory APR
such as 3% but then your rate could jump to 20% after a few months.
When comparing APR, read the fine print! Many will say “APR as low as…” which means not everyone will qualify.
THE IMPORTANCE OF CREDIT REPORTS
Maintaining Credit
Purpose of a Credit Report
Data Collection Track your personal, financial, and employment
information over timeCredit History
Credit lenders examine your past credit behaviors to determine how you might handle credit with them in the future
Employment Not all employers will check it, but some what to
see that you have demonstrated responsibility in your personal and professional life
What is in a credit report?
Personal Information Name, address, social security number, date of
birth, employment informationCredit Accounts
Type of account, date account opened, credit limit / loan amount, current balance, payment history
Credit Inquiries All creditors who have checked your credit report
in the last two yearsPublic Record / Collection Items
Bankruptcies, foreclosures, overdue debt collection, etc.
Credit Bureaus
The three major credit bureaus are: TransUnion Equifax Experian
Consumers have the right to request one free credit report per year from each bureau.
You should check your credit report on a regular basis to protect yourself from identity theft.
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